Last week, Norman Lamont and I addressed the CPA 2012 Conference in Melbourne. Yesterday we repeated that ‘gig’ in Sydney. Unwilling to deliver the same speech as in Melbourne (which was posted here), I chose to discuss the Euro Crisis from a slightly different angle (with very few overlapping paragraphs). As this was a closed-to-the-public conference, I am taking the liberty of posting below my talk and to upload my own recording of that presentation.For the talk’s text read on. For the audio click here.

SYDNEY ADDRESS – CPA, Wednesday 24th October 2012

1. INTRODUCTION – Nothing redemptive about the Euro Crisis

Thank you Michael. Thank you Ladies and Gentlemen.

In May 1991, a certain Paul Keating (Australia’s Treasurer at the time) introduced a vexed nation to the notion of the “recession that we had to have”. I am sure that not a soul in this auditorium has forgotten his comment. What you may not recall, however, is that thousands of kilometres away, another gentleman said, at precisely the same time, said something similar. He said: “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.” The gentleman in question was Britain’s Chancellor of the Exchequer at the time, a certain Mr Norman Lamont, in the presence of whom we are fortunate enough to be finding ourselves this fine morning.

Both Treasurers suffered political damage as a result of their remarks. But, whether one agreed with their policies or not, they had a point: Periods of growth powered by unsustainable credit, riding a bubble in real estate and in finance, give rise almost automatically to the corrective medicine of a recession. Sequential bankruptcies are to capitalism that which Hell is to Christianity: Unpleasant but essential.

There is, indeed, something redemptive about recessions.

They weed out companies whose fundamentals do not warrant their survival.

They correct wayward asset prices.

They restore profitability to the better companies.

They arrest humanity’s tendency to think that this time things are different and the laws of sustainable accumulation no longer apply.

Political economists of both the Left and the Right, have always known that which Mr Keating and Mr Lamont dared imply. Karl Marx, Joseph Schumpeter and Friedrich von Hayek are names that come to mind.

Nevertheless Ladies and Gentlemen, when you cast your wary gaze upon our European Continent, you should make no mistake: There is nothing redemptive about the recession we are now experiencing in the Eurozone and beyond. Instead, what we have is a Crisis that we did not have to have, one that produces no benefits, that comes with no silver lining – save perhaps for the morbid satisfaction that some of us feel as the result of having prognosticated that nothing good would come out of the Eurozone’s formation.

But it is, believe me, a rather shallow satisfaction – small pickings in the context of not only the wastelands of many of our countries but, perhaps more ominously, in the context of the grave dangers that the Eurozone’s disintegration harbours for peoples within and without its currency umbrella. People who, I am very much afraid, include not only our British friends but Australians too. After all, no economy is an island!

2. Europe created a monster

Initially, there were meant to be three speakers today on this stage. A formidable Eurosceptic, in the person of Lord Lamont. A representative of what I term institutionalised Euro-Loyalists, indeed a distinguished staffer of the Central Bank of Italy. And I, my greatest claim to fame being that I represent a glorious contradiction-in-terms – a Greek Economist and one that has been arguing since 2010 or a Greek default within the Eurozone.

Sandro could not be with us today, unfortunately. His contribution to balance would be significant because he would be the only one who sees a modicum of rationality in Europe’s handling of the Euro Crisis. For, like Lord Lamont, I too think that we Europeans created a monster in the form of the Eurozone. And just like Mary Shelley’s Dr Frankenstein, whose intentions were not all bad, we now find ourselves unable to control our creation; a vicious beast that is wrecking our neighbourhood with reckless abandon.

To cut a long story short, when we decided to bind our 17 economies together monetarily but not in any other meaningful way, we effectively did two things at once:

We removed the shock absorbers of flexible exchange rates

And we ensured that the next shock, when it hit, would be amplified massively

There is no doubt in my mind that the euro was a gross error. In this, I side entirely with Lord Lamont. We should never have allowed the separate agendas of Europe’s different elites to converge into this monstrosity. However, thankfully, for the interests of a lively debate, I shall disagree strongly with Lord Lamont regarding what needs to be done now.

Lord Lamont believes that the Eurozone should be dismantled in an organised fashion. It was a bad idea, let’s wind it down carefully but surely. Alas, this is impossible. No heavily financialised, highly leveraged single currency area has ever been dismantled ever before, ladies and gentlemen. The disintegration of the Latin Union in the 19th century or the Soviet Union and Czechoslovakia in the 1990s are irrelevant experiences in this context.

Consider for a moment how we might unwind the Eurozone. Suppose that it is the weakest link that goes first: The Greek PM summons Parliament on Friday afternoon, passes an emergency bill that reintroduces the drachma forthwith, declares that on Monday the banks will remain closed for a week, till their accounting systems are recalibrated and all notes held within the banks are stamped with indelible ink to mark them out as drachmas (as opposed to euros) etc. etc.

What do you think will happen next? Well, within ten minutes all ATMs in Greece, Ireland and Portugal would run dry, as panicky depositors in these weak economies withdraw as much of their money as they can, either expecting or fearing massive devaluation. Soon after, the Athens, Dublin and Lisbon governments will have to impose border controls impeding capital and human movements, so as to prevent a hemorrhaging of their economies. Instantly, they will have violated the most cherished principles of the European Union. When the financial markets open on the following Monday, intense panic will grip investors and Spanish-Italian bonds will be unloaded in fire sale resembling Margin Call – The Movie. At that point, Mrs Merkel will be presented with a cruel dilemma: Put up half of Germany’s GDP as a backstop for what remains of the Eurozone or succumb to the carefully orchestrated campaign of the Bundesbank to return Germany to the DM. Intense negotiations will begin with The Netherlands, Finland and Austria, perhaps with Poland and Slovakia as well, for their inclusion under the DM umbrella. Paris will be struggling to convince Germany either not to move into the DM direction or, if this cannot be prevented, to take France along for the ride. Germany will, obviously, turn Mr Hollande down and, as a result, a new DM currency union will be created east of the Rhine and north of the Alps. The new DM will go quickly through the roof as capital will flee from the rest of the world to Germany and its new lebensraum, causing a massive decline in exports, a stupendous rise in surplus Europe’s unemployment and, soon, deflation. Meanwhile, the rest of the Eurozone, whether they return to their own currencies or not, will enter a long period of stagflation as both prices and joblessness shoot up and up. At a time when the UK is in recession, the US is walking on egg shells, and the BRICS are bracing themselves for an emergency landing what effect do you think these developments will have on Australia? I submit to you ladies and gentlemen that you will then realise the Made in China bubble that you have been living in over the past three years. I hope and pray that I am wrong but you know that I may be right!

For even if the Eurozone’s dismantling were to be more orderly, with for example a German exit coming first and thus avoiding the worst of the tumult, the end result would be the same: deflation east of the Rhine and north of the Alps, stagflation everywhere else in Europe, a Great Depression in Britain and the United States and crushed dreams in Asia and Africa.

So, my message to my Eurosceptic friends of both the Left and the Right is this: Beware what you are wishing for. For the cruelest God is the one who grants us our wishes. We may wish that inane Euro-loyalists get their comeuppance; that they learn their lesson the hard way. But, tragically, the pain will spread far and wide and the vast majority of victims will be outside the Eurozone and will suffer far more than the Eurocrats.

3. EUROPE’S CRISIS: How to resolve it

If I am right that we should aim to fix the Euro rather than dismantle it, how should we fix it?

One thing is for sure. Certainly not by means of our current policy mix.

We must end bailouts that are being funded by CDO-like bonds that contain within them the domino dynamic which causes more European banks and states to fail sequentially

We must stop asking the German taxpayer to guarantee the Periphery’s debts on condition of Ponzi Austerity programs for countries like mine that are akin to a form of Fiscal Waterboarding that eliminates the country’s long term capacity to grow and repay its debts

We must end the denial that this is a systemic Euro Crisis that requires systematic treatment

Lastly, we must stop pointing moralising fingers at each other

A second certainty is that federation is not the solution to this Crisis. It is, at this stage at least, neither possible nor desirable as a Crisis fighting strategy. This Crisis is certain to outpace any moves toward federal structures and to destroy whatever Will there remains amongst our peoples for closer union.

So, where does this leave us? How do we fix the monstrous Euro for the sake of the whole planet? The answer is simple: By re-deploying our existing institutions, the ECB, the EIB and the ESM in a manner that ends the Crisis without asking from German taxpayers to guarantee a single euro of peripheral debt or indeed asking the ECB to print the missing trillions and without asking the peoples of Europe to give up more of their sovereignty. Technically, it is more than possible. The problem of course lies in the realm of politics.

4. Conclusion

In her final Parliamentary speech as Prime Minister, Mrs Thatcher famously said about the Eurozone:

“It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”

Hear, hear, I say. (You know that a crisis is deep when a leftwing Greek economist is quoting Margaret Thatcher!)

Where Mrs Thatcher was wrong was in her belief that Europe’s elites had federation on some secret agenda.

Proof that they do not have such an agenda is the current banking union debacle: Everyone knows a banking union now is a prerequisite for stopping Italy’s and Spain’s quick march into the Grecian Vortex. And yet Germany is single-mindedly working to wreck in practice the banking union which it pays lip service to. A typical case of confirming its pledge in the breach rather than in the observance.

In conclusion, ladies and gentlemen, the worst enemies of European unity are those who profess to serve and to believe in it. Not the Eurosceptics.

Indeed, those of us who despise the euro the most have the highest moral obligation to help fix it.

Technically we can achieve this in weeks, in a manner that we may discuss later this morning. But, as Mrs Thatcher, might have said today after consulting with Bill Clinton, “It’s the politics stupid!” And as we have found out over the course of the past three years, and twenty odd Summits, there is no shortage of organised stupidity on Europe’s political stage.

8 Comments

It’s not “the economy stupid”, nor, again, “the politics stupid” either; it is simply that for many decades now there has not been ANY mechanism within the Western economic model, particularly including Europe; to invest free enterprise equity capital back into small, local community, free enterprise businesses…….. when it’s the small businesses that create new, non government employment; jobs ….. Not the ECB, EIB or the ESM….. NONE of which has ANY mechanism to invest free enterprise equity capital back into new, very small businesses ….. to create new jobs.

It’s the lack of ANY mechanism, set of agreed rules, institutions, set up to deliver … “Free Enterprise Equity Capital ……(and, with the VERY Greatest of Respects); ….. Stupid!”

The Western economies desperately need millions of new employers; tiny, privately owned, well capitalised, one to five employees companies, owned and managed by the founders. Millions of free enterprise based companies creating their own idea of future prosperity. I have set that out in detail some time ago and I dare to suggest that no one has yet to strike it down as a solution.

Continuing to debate … the role of the ECB, EIB or, for that matter, the ESM …does not answer the question of where do you find the equity capital investment to create prosperous employment for the tens of millions now unemployed throughout the Western economies? Someone has to show the courage to admit the entire system needs a reboot.

I took this text serious until I reached the part where you came up with your ridiculous conspiracy theory “…carefully orchestrated campaign of the Bundesbank to return Germany to the DM…”. Then, of course, it was over with seriousness.

I agree the surplus Brics would be dead under a breakup but surplus Germany is really a mini me Bric in the heart of the Eurozone.
Since 1986 especially it has produced high quality grot which is its surplus – it exports to afford its imports.
It now produces goods the PIigs do not need.
Even France will go back to a 2 CV economy.
Germany is Dead – DED dead – the Rhine / Rhur complex services Londons credit note production – its a absurd creation.
There is no domestic German economy – they can’t even build one reactor now….they are almost as sad as the Irish , the really sad thing about them is that they don’t know it yet.

When a ecosystem changes around a animal the last thing a animal wants to be is efficient – this leads to extinction.
Animals that are redundent are the survivors in such a circumstance.
The Germans are simply too efficient – they cannot survive this coming drought.
We can no longer afford to subsidise them.

Dear Yianni,
You have said that economics is religion with equations. Having a passing interest in economics these days, I am looking around and I am seeing a lot of religion and very few equations (aside from accounting-style formulas).

A recent sensation in Greece is the study commissioned by a so-called Bertelsmann Foundation, which various media in Greece interpret (totally falsely) as “if Greece exits the euro, the cost to the world economy will be 17.2 trillion euros” !!!! (In the study, the 17.2E9 number is the cumulative cost up to 2020, if Greece, Italy, Spain and Portugal exiting EZ).

It is a criticism on “VIEW” and models of the like.Its also actually a different view from what Prof. Varoufakis predicts regarding a greek exit.I personally think the truth lies somewhere in the middle.I feel that each of the 2 views overlooks things that the other view overstates.

Thank you for the link. Having long professional experience with large-scale simulation, I can very much appreciate the absence of technical papers on the VIEW model (as claimed by the link’s author, I do not have the means to verify this). “Prediction by secret formula” is one of the most transparent types of scientific fraud in the hard sciences (and not that rare, where a lot of money is involved).

On the Grexit views expressed in the link, I share the same views as Mr. Mitchell (the author of the link). What Mr. Mitchell (and Krugman, Roubini etc) fail to discuss, and, I believe, is what prompts Yanni and many of his colleagues to shy away from this alternative, is that Grexit from the EZ will likely bring about a (perhaps temporary) exit from the common market as well, as at least two of the four basic liberties will need to be suspended temporarily (i.e., impose restrictions on capital and goods movement).

In the meantime, the situation here in Greece is dire indeed. Yannis and other economists are using fanciful terms like “collapse of credit” or “destruction of social economy”, which simply means that a large and growing percentage of people has stopped paying loan installments, owed taxes (nb. this is *on top of* tax evasion), insurance fees, bus fare, etc. I personally know at least 10 friends of mine who have given up and have stopped all payment–note that several among them *can* still pay, i.e., their decision is a revolt, not a necessity.

The government is desperate to receive a loan of 41 bn in the next month, to maintain some urgently needed liquidity. Yet, the lenders know that this is essentially a 41bn gift, not a loan, as the debt is already unsustainable. The conclusion of this suspenseful soap opera will be coming very soon on your favorite TV station …

One of the basic flaws of democracy is that people who don’t understand the issues vote just as passionately as those who do. As economics becomes more and more important to the survival of not just the EU but the entire global economic climate our policies are becoming less based in economics and more in the dogmatic magical thinking prevalent among the masses.

Until you can find more effective ways of making people understand these issues without boring them to tears or, worse yet, making them feel stupid, you are doomed to take a back seat to the voodoo economics embraced by voters and politicianc alike.

US

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